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How crowdfunding and mini-bonds are paying for Better Denver

Fri, 2014-10-03 06:00 -- Kevin Ebi

Municipal bonds used to be an almost foolproof way of paying for big projects. But with those falling out of favor with big investors, Denver was forced to think small. The investors behind its Better Denver project were small-time investors: its own residents.

Thanks to crowdfunding, Denver raised the final $12 million it needed in just one hour. Online orders for what they're calling "mini-bonds" came in so fast that they sold out before the city could stop selling them. It actually had to refund 375 online orders.

Unlike muni-bonds, which often sell for $20,000 or more each, Denver’s mini-bonds were just $500 and investors couldn’t buy more than $20,000. Only Colorado residents could buy them, and while they could give them as gifts, they couldn’t sell them on the financial markets.

Mini-bonds have always proved successful for Denver. This year’s bonds were the fifth issue. The first, five years ago, sold out in one week. It took longer then because people could only buy them by mail or at a bank branch.

Building community engagement For Denver, the bonds have always been about more than the money. The city is actually paying more interest on the mini-bonds than it would have paid for more traditional bonds. But it says the cost is worth it because the bonds help get residents more involved.

Before the mini-bonds, Denver was behind on maintenance to the tune of $25 million a year, forcing it to come up with large ballot proposals every so often to fill in the ever-growing gap. Its research found, however, that the detailed financial pleas only made voters question the projects more. Mini-bonds became a tool for helping people feel good about where their money was going.

Besides, the mini-bonds are a good investment for citizens. The return on Denver’s mini-bonds is roughly triple what residents could get with a bank certificate of deposit.

Mini-bonds may be the wave of the future While Denver is one of only a handful of cities offering such bonds, it may eventually become one of many. A driving force could be new rules that make traditional municipal bonds much less attractive for some of the institutions that have been most likely to hold them.

Banks make their money by loaning out as much of the money deposited with them as they can. To prevent banks from collapsing, they’re required to hold a certain amount of those deposits in very liquid investments – investments that can be turned back into cash very quickly.

Municipal bonds, because of their security and desirability, used to count as a liquid asset, but no longer. Under new rules from banking and financial regulators, municipal bonds now count as a regular investment and no longer meet that reserve requirement.

That change may prompt banks to replace municipal bonds with investments that deliver greater returns, and force cities to look to smaller investors to fund big projects.

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Get more financing ideas in the Smart Cities Financing Guide. Developed for the Council by the Center for Urban Innovation at Arizona State University, it provides expert analysis of 28 municipal finance tools for city leaders investing in smart technologies. (Note: The Guide is available at no cost to members of the Smart Cities Council. If you have not yet joined, please take a moment to complete a one-time free registration.)